The ABC’s of the Economic Crisis: What Working People Need to Know
Fred Magdoff and Michael Yates

Monthly Review Press (2009)

Book Review

In the ABC’s of the Economic Crisis, Magdoff and Yates use stagnation theory to explain the origins of the current global economic crisis. Karl Marx predicted that overproduction and stagnation would be inevitable under monopoly capitalism once market demand has been saturated. Magdoff and Yates use the auto industry as an example. Immediately after World War II, consumers bought a lot of cars and trucks which were unavailable between 1941 and 1945. By 1970 there was a surplus of cars – all the Americans who wanted cars and trucks had already bought them. Meanwhile the world’s poorer nations didn’t have a mass market large enough to reduce this surplus.

The same was true of other durable goods (refrigerators, washing machines, dishwashers, vaccuum cleaners, etc). And as consumer buying slowed, so did profits and GDP growth.

Why Capitalism Didn’t End With the Great Depression

Many Marxists (including John Strachey in The Coming Struggle for Power) believed the Great Depression signaled end stage stagnation and the imminent death of capitalism. According to Magdoff and Yates, it was only the massive economic boost of World War II military spending that saved capitalism in the thirties and forties.

There was also a brief post war boom in the fifties and sixties, as consumers rushed to buy goods that were unavailable during the war. When the sixties ended, stagnation set in again, accompanied by a marked slowing of profits and growth. However neither declined to 1930s levels, thanks to the “financialization” of the US economy.

The Financialization of the US Economy

The term “financialization” describes the process of creating profits without producing products or services. In the US, finanancialization injected money into the economy in three ways: via massive government spending and indebtedness (to private banks), via massive consumer indebtedness and via an explosion in the trade of derivatives and similar financial products.

Between 1980 and the 2008 crash, the banking, insurance and investment sector became the largest growth sector of the US economy. Beyond financing unprecedented levels of consumer, business and government debt, this sector also engaged massively in speculation (ie gambling).

Financialization: A Giant Ponzi Scheme

As Magdoff and Yates describe, the enormous “wealth” created by the financial sector helps to drive the “real” productive economy. The main problem with financialization is that it’s basically a Ponzi scheme – it can continue only so long as economic growth continues. If it goes on too long, the speculative bubble will burst, resulting in financial collapse, as it did in 1929 and 2008.

The Link Between Declining Profits and Low Wages

Despite the life support provided by “financialization,” economic stagnation continued between 1970 and 2008. As Magdoff and Yates point out, GDP growth dropped from 4.4 to 3.3 percent in the 1970s, to 3.1 percent in the eighties and nineties, and 2.2 percent between 2000 and 2008.

A significant decline in wages and purchasing power accompanied this decline in profits and growth. In order to keep workers consuming, the corporate sector compensated by giving them credit cards – lending them money at 18-20% interest they were no longer paying in wages.

Comments
  1. auntyuta says:

    “The term “financialization” describes the process of creating profits without producing products or services. ”

    No wonder, what is called “profit” sounds more and more abhorrent to me.

    Thanks for this book review, Stuart. It is very interesting to think about it what capitalism represents.

  2. Thanks, Aunty. The book is actually quite an easy read despite all the technical economic language. It describes how everything works in very simple, easy to understand language.

  3. futuret says:

    THANKS FOR THE ARTICLE, WE CAN SEE AND UNDERSTAND HOW WE ARE ALL GOING TO BECOME GLOBAL STREET PEOPLE. EVERY HEMISPHERE HAS IT’S WICKED DECEIVERS THAT IS FOR SURE.

    • Futuret, re your comment: “We are all going to become global street people.”

      Not if I can help it. There are millions of people around the world fighting this global abomination – you just don’t hear about it in the corporate media.

      • futuret says:

        I AM DOING MY BEST AS WELL. HOMELESSNESS HERE IS BEING DESCRIBED AS OVER THE TOP. SHOULD I HAVE A BREATH IN MY BODY, LOOK FORWARD TO FIGHTING ALONG SIDE OF YOU WITH THE OTHERS. ONE THING YOU CAN COUNT ON IS THAT THE LANDLORDS LOVE THE CORPORATE MEDIA, TO ME IT IS A PART OF DISTRIBUTING MORE HELL.

  4. Dennis N. says:

    Futuret, re your comment: “We are all going to become global street people.
    Thanks for this book review, Stuart.

    • futuret says:

      REMEMBER WE STREET PEOPLE AND FUTURE STREET PEOPLE MUST BOND TOGETHER. I GUESS THEY HAVE MADE ME INTO BEING A FUTURE ELDERLY HIPPIE, AND WHO IN THE HELL ARE THEY TO TALK ABOUT A REVOLUTION. PASS DOWN THE WEED AND THE PROTEST GEAR.

  5. Thanks for commenting Dennis. Not sure where you live, but I found a secondhand copy of the book for $3.64 at Abe Books: https://www.abebooks.com/servlet/SearchResults?sts=t&an=&tn=the+abcs+of+the+economic+crisis&kn=&isbn=

  6. TechEbook says:

    Futuret, re your comment: “We are all going to become global street people.
    Thanks for this book review, Stuart.

  7. Thanks for commenting, TechEbook. I’m really hoping people will read the book. Economics is a lot easier to understand than people think.

  8. Futuret, re your comment: “We are all going to become global street people.
    Thanks for this book review, Stuart.

  9. Hello! The Student Economist blog has only just started, but if you enjoy a quick and enjoyable read about the world of economics, visit the website!  http://www.thestudenteconomist2017.wordpress.com

  10. Nice blog, Student Economist. Thanks for sharing the link.

  11. Harold's says:

    Thanks for this book review, Stuart. Futuret, re your comment: “We are all going to become global street people.

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